This is actually exactly what Sun Certified Programmer for Java 6 Study Guide says should happen, because package names are atomic, and can't be split up like I'm doing here. But why exactly was it decided to make package names atomic like this? Wouldn't it be a handy shorthand to be able to import <animal.reptile> like "UseLife2.java" does and then refer to <reptile.Snake>?

As for why it was decided by the original designers... you'll have to hunt down the original designers and ask them.

To me it seems like your proposal is just another source of ambiguity which would have to have rules written and documented (in the Java Language Specification) and implemented (in compilers) for little or no benefit.